Read This Before Investing in Wynn


Wynn seems to be a great bet on Macau growth, but not so when compared to the industry as a whole. Photo: NY Times

Shares of Wynn Resorts (NASDAQ: WYNN  ) surged over 6% following the company's earnings release, as the company beat estimates on earnings per share thanks to growth from its Macau operations. However, its total revenue growth of 9.7% is not quite so good in comparison with the results from Las Vegas Sands (NYSE: LVS  ) and MGM Resorts (NYSE: MGM  ) , Wynn's main competitors. Investors should look at how well the industry as a whole did this quarter before they decide to be so happy about these results.

The key facts laid out in the Wynn Resorts earnings report include:
Total revenues up 9.7%

Macau revenues up 14.2%

Las Vegas revenues down 1.5%

Occupancy rates up to over 98% from 93% in the first quarter of 2013

Wynn Resorts' investors should be happy that the company is posting revenue growth of nearly 10% year-over-year. Additionally, the company posted solid revenue from its VIP gaming operations, as concerns about this had sent its stock price down a few weeks ago. Simultaneously, the company was able to increase its mass-market revenue in Macau by over 23% year-over-year, which seems to have helped drive up the company's hotel occupancy rates.

The stock is climbing today as more investors buy Wynn on these good results, but should new Wynn investors feel so excited about this earnings release? Wynn was left behind this quarter by Las Vegas Sands and, to a lesser extent, by MGM Resorts. If you are a new investor looking to get into the gaming industry, this company probably shouldn't be your first buy-in. This table shows what Wynn's "solid earnings" look like in comparison with the industry.

Wynn Resorts vs. Las Vegas Sands and MGM Resorts

 

Wynn Resorts

MGM Resorts

Las Vegas Sands

Net Revenue

9.7% Growth YoY

12% Growth YoY

21.4% Growth YoY

China Revenue

14.2% Growth YoY

33% Growth YoY

49% Growth YoY

Share Price

$219

$24.33

$76

P/E (TM)

31

63

24.4

Las Vegas Sands led the field with net first-quarter 2014 revenue of a record $4.01 billion, up over 21% year-over-year. This was led by the company's huge bet on Macau, which paid off with nearly 50% EBITDA growth. MGM Resorts came in at a not-so-close second as it also posted solid results from its China operations, though it posted revenue growth of barely more than half of that of Las Vegas Sands. 

A key reason why Las Vegas Sands has been able to crush this quarter is through revenue growth in Asia. This not only includes Macau, it also includes revenue from the company's operations in Singapore. Because Sands is a front-runner in the bidding to win a casino in Japan, this trend seems like it will only grow. Wynn, by contrast, gets 75% of its revenue from Macau. MGM only gets 37% of its revenue from there, with most of the company's global revenue still coming from Las Vegas and the U.S. Northeast region.



Las Vegas Sands not only beat Wynn Resorts and MGM Resorts on total net revenue and net revenue growth, it remains better at driving mass-market consumer growth as well. Wynn investors are excited about the company's 26.7% growth in VIP table games wins, which surpassed the company's 23.7% growth in mass-market revenue during the first quarter. Yet compare this to Las Vegas Sands' increase of 54% year-over-year in mass table wins and MGM Resorts' mass-market increase of 45% for the quarter. In fact, Wynn is actually driving down the industry-average figure of a 40% mass-market increase, according to analysts at Barrons.

The middle class of China, which makes up most of the mass-market consumer base of gaming companies, continues to boom. According to research by the McKinsey group, by 2022 more than 75% of China's urban consumers will earn between $9,000 and $34,000 a year while 4% of the total Chinese population fell within that range back in 2000. Thus, the mass market has become the focus of the gaming industry. For this reason investors should focus less on Wynn's gains in VIP gaming and worry more about Wynn's potential shortcomings in regard to gaining mass-market growth.

One more reason to believe in Las Vegas Sands over Wynn: The coming casinos on the Cotai strip
Wynn investors are excited about the coming $4 billion Wynn Palace on Cotai with an expected opening date in 2016. The brand new resort will include a 1,700-room hotel-casino, a performance lake which will put the one in Las Vegas to shame, and much more. One major operating highlight of Wynn's first-quarter earnings was that the company raised its hotel room occupancy rate to 98.1% from 93% in the year-ago period. Therefore, the new resort and the added rooms should help provide more space for the company to continue growing.


CEO Steve Wynn introduces the vision for the new resort on the Cotai strip back in 2012. Photo: Reuters

However, once again Las Vegas Sands is making a bigger bet on visit growth. The company's new Cotai resort, the Parasian, is set to open in mid-2015 and it will include over 3000 new rooms. Because Las Vegas Sands has done a better job of recruiting mass-market players to come to its casino, it will need places for those gamers to sleep. This is one more sign that Las Vegas Sands is making bigger bets on the trends that are driving growth in Macau.

Foolish takeaway: Bravo to Wynn on a good quarter, but in comparison with the industry its numbers aren't impressive
With an industry growth rate of 19% in 2013, it would be hard for any casino company to be in Macau without reporting at least some revenue growth. That overall Macau gaming growth has helped Wynn to post nearly 10% total revenue growth despite a decline at its Las Vegas operations. However, in comparison with figures from the industry, especially those of Las Vegas Sands, these earnings are not very inspiring. Investors should look at Wynn's first-quarter earnings with a perspective that considers the results from the industry and Wynn's competitors before making a pick. 

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 12, 2014, at 12:38 PM, yourbestfriend wrote:

    Don't bet against Wynn. In fact, picking just one player in Macau is foolish to the point of being anti-Foolish.

    Wynn, MGM, Melco Crown, and LVS are competing with HK-traded companies like Genting, Galaxy Entertainment, and SJM (some have presence on American exchanges under Y- or F-tickers, or sometimes both; Wynn has a 75%-owned subsidiary, Wynn Macau, that feeds WYNN profits, but also trades as WYNMF (foreign stock) and WYNMY (ADR), and in HK as 1128).

    There's a stratified mix of play targeted by Chinese casinos. All of these companies spread a mixture of mass-market, "premium-mass", and VIP. They gauge their mix to optimize the investment they've made in property quality and the traffic mix entering the territory, which can fluctuate based on the calendar. Among them, Wynn is the one that is most focussed on VIP. This is partly due to admitted underinvestment, and partly due to Wynn simply being a VIP-grade company itself. It does have a decent allocation to mass and premium-mass traffic, but is most affected by VIP among the group. The other companies are spread into the lower-end play somewhat more, though none of them can be said to be purely mass-market.

    While it's statistically true that the mass-market end is growing faster than VIP (China's infrastructure and investment decisions to build nearby Hengqin island are effectively expanding the hotel space, allowing for more tourist-grade travel with easy access to the gaming tables), VIP is still growing, and there are fewer casinos specializing in it. The larger number of companies competition for mass-market players balances out the slower growth of VIP, from a ROI-growth standpoint. It remains to be seen which is really better, and the best ramp of mass-market growth is likely past. Legal changes to allow more tables to be licensed might restart it, but would also have to include growth in VIP, and might be a wash.

    Also, while Wynn and LVS (and many of the others) are bringing new property online in the next two years, Wynn, being significantly smaller, stands to gain more proportionally from the addition of one unit. LVS also is making noise about wanting to overbuild in Japan (Adelson's ridiculous plans for Spain kept me from buying any LVS until he withdrew them last Fall). At this point I wouldn't consider either to have an upper hand in the long run, but Wynn is an overweight relative to LVS until Wynn Palace opens in early 2016.

    When there are reasonably similar chances on both sides of a choice, and little chance of loss on either side, a rational investor diversifies into both, to hedge against unforeseen pitfalls, and to nullify error in evaluating the chances. Absent a clear reason for a distinct advantage, that's what Fools should do, not guess and hope.

    You're buying casino stocks to get the House Advantage on your side. It wouldn't be right to revert to gambler psychology to decide among them.

    Disclosure: I'm long WYNN, MGM, MPEL, and LVS, as I see them as having the best quality management and internal controls, and I dislike the possible tax ramifications of playing foreign tickers. Genting is a diversified resort company (they started in theme parks) that just bought one of the defunct projects in Las Vegas and is building a megaresort there that I'd like to have some of, and Galaxy and SJM are not to be sneezed at for their access and scope in Macau. What I avoid are junket stocks, since I expect they're all run by thugs, given they have to have some way of collecting in China, which has no law to use in the courts to compel payment of gaming debts; they're also clearly prone to embezzlement, as recent news suggests. Oh, and I wouldn't buy Universal Entertainment, not even with other people's money.

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